Funding a quality pension fund is a balancing act

Properly funding a public pension plan requires lawmakers to embrace certain principles that take into account competing interest that can be difficult to navigate, a paper by the American Academy of Actuaries said.

Policies need to maintain a balance among the “competing objectives of benefit security, generational equity and contribution stability,” the paper said.

In other words retirees need to be able to count on their monthly benefits, taxpayers of different ages need to be treated in a fair manner and contributions by government bodies to pension funds must be made in a steady way.

The academy said good communication is the underpinning to keeping a plan on target.

First, a policy should be produced that enumerates how the objectives have been balanced against the competing interests and precisely how the plan will be funded.

Second, a funding target should be established to ensure benefits can be paid and any variations caused by market swings should be made up in a timely manner.

Third, risks to achieving objectives should be “identified, anticipated and communicated” and fund managers should monitor its status, comparing it to the stated objectives. As the plan is monitored, adjustments to contributions and investment allocations should be made to ensure proper funding levels.

Finally, mandated contributions must be made as planned to ensure the pension system remains on track.

The academy urged policymakers to use actuarial methods to ensure that each generation of taxpayers pays for pension costs based on the services it receives. Although these costs can be established, obstacles to implementing such generational fairness include a drop in the funding balance because of investment losses and lack of contributions by previous generations.